City says water utility sale averts big rate increase

$515 million purchase of the Indianapolis Water Co. scratches plans by NiSource to request 30 percent hike.

By Doug Sword

doug.sword@indystar.com

December 19, 2001

The city's purchase of the Indianapolis Water Co. will save the average homeowner more than $6 a month by averting the utility's plan to seek a 30 percent rate increase.

That's according to city officials, who have pledged that water rates won't budge for at least several years if the city's proposed $515 million purchase of the utility is completed.

The city found out about the utility's plan to seek the rate in crease during negotiations with the water company's parent, NiSource of Merrillville, said City Attorney Scott Chinn.

The justification for the rate increase would have been the water company's investment of more than $200 million over the past four years to improve its system and NiSource's need to recoup some of the $288 million it spent to buy the utility in 1997.

"Now that the city is in the game, now that the city has inked the deal with NiSource . . . that rate increase won't be necessary," Chinn said.

The buyout's chief architects, Mayor Bart Peterson and City-County Council President Beurt SerVaas, have long argued that the benefits of city ownership, such as not having to pay taxes or dividends, could be passed along to consumers. However, officials had previously declined to estimate how much consumers could save.

That's because city officials had signed confidentiality agreements forbidding them to reveal details about the water company's operations while negotiations were going on, Chinn said.

The planned rate increase came to light Monday night. As he urged council members to approve the city's purchase of the utility, SerVaas told them the government buyout would save ratepayers from a 30 percent increase. The council approved the purchase 21-6.

Though Chinn said NiSource agreed to reveal its plans to seek the rate increase, a NiSource spokeswoman declined to comment on the matter.

Majority Leader Phil Borst said the big rate increase -- which would have followed 1998 and 1999 increases amounting to 12.5 percent -- would have been just for starters.

NiSource was ordered to sell the water company to win approval from federal regulators of its $6 billion purchase of Columbia Energy Group of Virginia. NiSource planned to sell the Indianapolis utility to the highest bidder, and some estimates placed the price at $700 million or more.

If another company had bought the utility for that price, that would have set the stage for a second rate increase of 30 percent or more in the next year or two, Borst said.

Exercising a long-held right to buy the utility, the city headed off bids from other companies and announced in November that it had reached its $515 million deal for the utility.

And that means savings for customers, city officials say. A typical family of four uses about 7,500 gallons of water a month and is charged $20.45. A 30 percent rate increase would have pushed that monthly bill to nearly $27.

Anne Becker, the state's utility consumer counselor, said that even if the water company had sought the 30 percent increase, that doesn't mean it would have been approved.

A company can try to recover the money it spent to acquire a utility, but it has to show that consumers got something out of the deal besides an exchange of one corporate parent for another, Becker said.

The city estimates that even in a slow economy, it can avoid a rate increase for four years. If the economy picks up, a rate increase might not be needed for a decade or more.

Those projections could help win support for the city's purchase from Becker's Office of the Utility Consumer Counselor, which represents consumer interests in rate cases, and final state approval from the Indiana Utility Regulatory Commission.

"I think the city's acquiring the water company and assuring there's not going to be a rate increase is good for the customers of IWC," Becker said.